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Exchange, industry, and adaptation: economics in Minnesota

In the 1980s, Governor Rudy Perpich touted Minnesota as “the brainpower state.” This is, ultimately, the story of Minnesota’s economy.

A man deposits money in the Bank of St. Paul, March 1933.
A man deposits money in the Bank of St. Paul, March 1933.
Courtesy of the Minnesota Historical Society

The economy of Minnesota has changed dramatically over hundreds of years. In that time, it has shifted away from natural resource development and the production of agricultural products and evolved into a broad-based system built on a foundation of natural resources, physical capital, and human ingenuity.

The story of Minnesota’s economy is vast, so this essay focuses on trends and key developments. It links to other MNopedia entries that allow readers to explore specific topics in greater depth. The omission of particular industries or businesses is not a judgement about their importance for Minnesota’s economic development but a choice made to keep the length of the article manageable.

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Indigenous economies of subsistence and exchange

Trading systems connected Indigenous nations across North America long before European settlement. The peoples living in what is now Minnesota, an area well connected by extensive waterways, participated in this system. Cowrie shells from the Gulf of Mexico, dentalium shells from the West Coast, copper from the Great Lakes, and obsidian were all used. Pipestone from a quarry in southwestern Minnesota was traded across the continent.

The economies of both the Dakota and Ojibwe people were based on seasonal cycles of hunting, fishing, planting, gathering, and harvesting. In both groups, families cultivated maize, squash, and beans in small plots near their summer villages. They traveled to customary locations through the spring, summer, and fall to make maple sugar, gather nuts, berries, and other plants, and harvest wild rice. Hunting and fishing was carried out in all seasons, but especially fall. Bands split up in winter to live in small family groups in sheltered woods. Perhaps because both peoples had access to plant and animal resources, there is no tradition of exchange of food items between them.

A gendered division of labor played important roles in these economies. In both Dakota and Ojibwe bands, women’s responsibilities included gathering and preparing food, tanning hides, making clothing, constructing tipis (Dakota) and wigwams (Ojibwe), and caring for children. Men’s duties involved land clearing; hunting, fishing, and trapping; and defending the group from attack. As in most societies, men’s and women’s work was complementary. One scholar of Ojibwe life goes further, stating that due to the importance of food production the women in these communities were the primary managers of these economies.

The French first began trading with Ojibwe people of the Great Lakes in the 1600s. The Ojibwe bands became middlemen, supplying the Dakota with desirable trade goods: blankets, metal pots and knives, guns and ammunition, and traps. But when Ojibwe traders also traded weapons to the Cree, who were traditional enemies of the Dakota, the arrangement fell apart. By the mid-1700s, the Dakota had established direct trading relationships with the French in the southern reaches of the Dakota homeland. Both Dakota and Ojibwe communities also supplied fur traders with wild rice, their main foodstuff, in exchange for trade goods.

The European fur trade of the eighteenth century built on, and over time altered, Indigenous economies. Traders advanced guns and traps on credit in the fall, and families settled up at the end of the season. Ojibwe and Dakota societies incorporated new goods in ways that were consonant with their traditions and ways of life.

Kinship networks formed important links in these trading systems. Trade involves trust, and trade with relatives carries stronger expectations for mutual support and care. In the eighteenth century, for example, Dakota and Ojibwe people created temporary kinship relationships with Europeans in order to carry out transactions. Over time, European, and later American, men in the trade entered into marriages with Dakota and Ojibwe women following Indigenous rather than Christian traditions—“according to the custom of the country”—in order to form permanent kinship bonds.

The descendants of these marriages created permanent links between Indigenous and European economies and communities and fostered trade. In the Red River Valley, people of mixed ancestry (métis) evolved into a separate Métis Nation, with a distinct culture and language. Métis traders, along with others, transported furs and goods between settlement at what is now Winnipeg and the growing entrepôt of St. Paul. The two areas were linked by a network of trails along the Red River Valley created by ox-driven vehicles known as Red River carts.

When hunting became more difficult in the 1830s and later, traders continued to extend credit, knowing that eventually, Dakota and Ojibwe leaders would be forced to sign treaties surrendering land to settle the people’s debts. The fur trade became the Indian trade. With the signing of a series of treaties, the Dakota and the Ojibwe were forced to give up the land and move to reservations. Families kept up traditional practices of hunting and gathering, to supplement the crops they raised and the inadequate rations provided by the government. (The settler-colonists taking the land around the reservations also hunted and gathered extensively, in order to survive bad crop years.)

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Most Dakota were removed from the state after the US–Dakota War of 1862. Ojibwe men and women found work as agricultural laborers and lumberjacks; they also continued to sell wild rice, maple sugar, berries, and other goods. Dakota and Ojibwe families continued to meet and trade at annual gatherings like the White Earth Powwow. In one remarkable example of exchange, a Dakota person might exchange a horse for an intricately beaded bandolier bag made by an Ojibwe woman.

Logging, agriculture, and transportation before 1920

Logging and lumber milling proved to be even more important than fur trading to Minnesota’s future prospects. Scholars estimate that before Europeans arrived, forests covered 70 percent of Minnesota’s land area. Local, regional, and national urban growth generated high demand for lumber, and over the nineteenth century, Minnesota’s white pine forests supplied much of it.

The industry began in the 1830s with small-scale logging and milling operations. These tended to be owner-operated businesses—small groups of men using hand tools for felling trees and water-powered sawmills for processing timber into lumber. Felled timber travelled down rivers to be processed into lumber near construction areas.

In the 1850s, entrepreneurs started harnessing the waterpower of St. Anthony Falls (Owamniyomni) to build larger and larger sawmills to meet the growing demand for lumber in St. Paul, St. Anthony, and, eventually, Minneapolis. From the 1870s to the 1890s, lumber mills grew even larger in scale. Eventually, the advent of steam-powered technology cut the ties between milling and water power, allowing sawmills to locate wherever it was convenient. This led to an almost complete destruction of forest resources during the last quarter of the century, especially in northeastern Minnesota, and led lumber barons such as Frederick Weyerhaeuser to move their operations from the Midwest to the Pacific Northwest.

Euro-American agriculture spread throughout Minnesota starting in the 1840s through the small, family-owned and -operated enterprises of settler-colonists from the eastern United States along with immigrants from abroad. Mechanization of harvesting and planting in the 1860s allowed families to cultivate larger farms and allocate higher percentages of their land to raising crops and cattle for sale in regional and national markets. Wheat was the key cash crop, leading to a budding infrastructure of mills, bankers, and brokers throughout southeastern Minnesota to bring the harvest to market. This system spread north and west as farming moved from the southeastern part of the state, eventually reaching the Red River Valley in the 1870s. Expanding transportation networks facilitated closer ties between farmers and these markets, for better or worse.

Steamboats were a key element in the state’s transportation system from the 1840s through the 1870s. Starting in the 1840s, steamboats connected St. Paul with ports downriver. Merchandise delivered to St. Paul could be loaded on Red River carts for delivery to northern Minnesota or transferred to steamers operating on the Minnesota River between St. Paul and Mankato. By the 1870s, steamboats operated on the Red River as well as Lake Superior.

By the mid-1860s, St. Paul was connected by rail with Milwaukee, Chicago, and other eastern cities. Railroads started to supplant steamboats for long-distance transportation in the late 1860s, and during the 1870s the rail network within Minnesota exploded, connecting virtually every town with the rest of the state.

Over the course of the next forty years, the railroads became one of the largest industries in Minnesota. The Northern Pacific, the Great Northern, the Soo Line, and dozens of other railways built thousands of miles of track along with depots, repair shops, and offices throughout the state and employed thousands of people in dozens of occupations. Businessmen such as James J. Hill built fortunes integrating agriculture, manufacturing, and mining into an interdependent economic system through the development of the railway network.

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Manufacturing, services, and mining before 1920

Manufacturing in Minnesota originally focused on processing timber into lumber and grain into a variety of products. For instance, flour milling began in the 1850s at a variety of places around the state, but quickly started to consolidate in larger towns during the 1860s. Minneapolis became the center of the upper-Midwest milling industry in the 1870 and then the national leader from the 1880s through World War I. Distillers and brewers like Theodore Hamm and Moorhead Brewing Company developed throughout the state as a way of adding economic value to corn, barley, and wheat.

Meatpacking followed a path similar to flour milling and brewing. Regional stockyards formed in the 1870s and 1880s throughout the state so that local ranchers and swineherds could drive cattle and pigs to market. These regional operations were then connected by rail with larger operations, with South St. Paul and Austin emerging as focal points for the industry in the 1890s and early 1900s. Swift and Armour, both based in Chicago, set up collection stockyards and processing plants in South St. Paul, while George Hormel developed his own operations in Austin.

The growth of these industries led, in turn, to the growth of related industries and services. Blacksmith and machine shops grew in small and large towns to build and repair equipment. Tanners processed the hides generated in animal processing to provide raw leather for making harnesses for horses and mules, leather belting for industrial equipment, and shoes and boots for Minnesotans. Tailors, milliners, and dressmakers produced clothing and hats using cloth made both in Minnesota and imported from around the world (including silk brought in from Asia via the Great Northern Railway.) Furriers used pelts from animals trapped throughout the region to create coats and hats for Minnesota’s cold winters.

Occupations in transportation and milling were particularly dangerous, which led to a unique Minneapolis industry: the design and production of artificial limbs. Railroad injuries and industrial accidents often led to amputations and, when combined with childhood diseases such as polio and increasing dangers posed by mechanized farm equipment, the upper Midwest provided an ample market for braces and artificial limbs. The Minneapolis economy had the materials (lumber, leather) and the mechanical know-how to meet these needs.

Banking, insurance, and a variety of financial services developed to meet the demands of businesses and households throughout the state. Banks, in particular, like Northwestern National in Minneapolis (founded in 1872), were chartered by both the federal and state government. This led to a patchwork of regulations that allowed bankers to invest in a wide variety of enterprises both in their own areas and beyond. Insurance companies specialized in an assortment of lines to meet the needs of Minnesota enterprises such as farm insurance, fire and accident coverage, and transportation policies for both maritime and railroad businesses.

Iron ore mining began on the Vermillion Range in the 1880s using underground mining technologies that had previously been used in iron, copper, and coal mining. This gave Minnesota mining companies a foothold in the national market for iron ore. The industry grew massively starting in the 1890s due to the exploitation of iron ore deposits in the Mesabi Range. The Merritt family built mines, a railroad, and docks between 1890 and 1893 to extract and ship their ore, until the financial panic of 1893 found them unable to pay their debts. They sold their holdings to John D. Rockefeller in 1894, but he owned no steel mills and had no expertise in mining. The sale led to an arrangement among Rockefeller, the steel baron Andrew Carnegie, and a Pittsburgh businessman named Henry Oliver to develop the Mesabi. The Oliver Mining Iron Company mined the ore, Rockefeller-owned railroads and ore boats transported the ore to Carnegie’s mills, and Carnegie Steel processed the ore into the steel products demanded throughout the US and the world. The Cuyuna Range came on line in 1907, and Minnesota’s Iron Range formed the center of American iron ore production for years to come.

All of these endeavors in manufacturing, mining, transportation, and agriculture required increasing supplies of labor. Immigrants, particularly from Europe, provided much of the brains and brawn that powered this growth. Norwegian and Swedish immigrants filled the labor markets of the Twin Cities along with the farms of southern Minnesota and the Red River Valley. Forty-three different immigrant groups met the insatiable demand for mine workers, mechanics, grocers, teachers, and all of the other jobs needed to create what became the economy of Minnesota’s Iron Range.

Growing pains and new directions: 1920–1950

Up to World War I, Minnesota’s economic ecosystem led average incomes to rise relative to the national average. After World War I, however, Minnesota’s average income fell behind the nation’s and remained there for the next fifty years.

In the early 1900s, and especially after World War I, Minnesota agriculture adjusted to changing circumstances. Wheat production moved from the northern plains of the Dakotas and Minnesota to the high plains of eastern Colorado, western Nebraska, and Kansas. Minnesota’s farmers responded by raising new crops and animals. Corn production increased both in absolute terms and as a percentage of total crop production as farmers adopted new pest control techniques and new seed varieties, especially hybrid corn. Soybean cultivation grew dramatically, first as a forage crop for livestock and then for human consumption. Dairying rivaled the production of cattle and hogs shortly before World War I and surpassed them in the 1920s.

Minnesota’s manufacturers shifted from processing commodities (such as timber to lumber and wheat to flour) to creating products that used processed commodities as inputs and generated higher incomes and profits. For example, companies such as the Weyerhaeuser Timber Company began producing paper and a variety of paper-based packaging products and diversified away from harvesting timber and milling lumber. Flour millers evolved into packaged food companies. Washburn-Crosby Company (later General Mills), created consumer products such as Bisquick and Wheaties and brands such as Betty Crocker, while continuing to produce flour. Companies such as Minnesota Valley Canning Company (more famously known as Green Giant) transformed fresh vegetables that were subject to spoilage into shelf-stable products that could be transported all over the country. Meat processors such as Hormel moved from slaughtering and meatpacking to manufacturing meat products such as SPAM.

The movement from processing raw materials to using raw materials as an input to higher value-added products shared a key resource: the application of private research and development to create new goods. Washburn-Crosby, Pillsbury, and Hormel, to name three companies, started their own research laboratories to develop new production processes and products.

Research and development led to new manufacturing industries as well. Honeywell, the company that made Honeywell thermostats , evolved between the 1880s and the 19030s out of a succession of businesses tinkering, research, and patents, all with the goal of controlling the temperature in a home or office. This led to expertise in the more general field of industrial controls, which became the core of Honeywell’s business from the 1930s onward.

3M began as the Minnesota Mining and Manufacturing Company in 1902. Its goal was to produce sandpaper for industrial uses by tapping mineral deposits in northeastern Minnesota. The mines turned out to be useless for this purpose, but with further research and development, 3M eventually developed a product that was attractive in the woodworking industries. It then hit its stride in the burgeoning automobile industry of the 1920s. 3M’s experience working with General Motors and other car companies led to perhaps their most famous product: Scotch Tape, originally developed to separate different colors in two-tone paint jobs.

Starting in the 1940s, Minnesota’s manufacturers and mining industry added two other elements to innovate in new directions. First, government- and university-funded research and development provided new technologies that private companies could adopt, improve, and apply to new markets. Second, government demand for goods and services, both direct and indirect, provided the impetus for companies to both produce new products and produce them using mass production methods.

An example of public-private research and development was the invention of the taconite production process. World War II put heavy demands on high-quality iron ore and rapidly depleted the Mesabi and Cuyuna ranges of their best deposits. For many years, however, geologists and miners knew that a lower-quality ore, taconite, was abundant, but could not be used directly in the blast furnaces of the 1940s. Edward W. Davis, a professor at the University of Minnesota, started working on a method of processing taconite into pellets that could be used in conventional blast furnaces in 1913. Over the next 30 years he refined the process, and by the late 1940s US Steel was ready to commercialize taconite as a substitute for raw ore. This led to the creation of an entirely new industry in the 1950s and 1960s based on the foundation of the original iron ore of the 1900s and 1910s.

Becoming ‘above average’: 1950 to the present

The growing pains of moving from an economy based on processing raw materials, such as grains and timber, to producing innovative consumer and industrial goods paid off after World War II. The combination of private and public research along with growing public and private demand pushed Minnesota’s manufacturing into areas that generated higher and higher value added and Minnesota’s average income grew from 15 percent below the national average at the end of World War II to 5 percent above it by 1980.

Agriculture continued to change in the decades after World War II. In particular, the development of chemical fertilizers and new varieties of seeds increased yields per acre more rapidly than ever. At the same time, domestic demand for raw and processed agricultural products grew more slowly. This had two important effects. First, American farmers started exporting a growing percent of their production, which tied Minnesota’s economy more tightly to the global economy. This meant that Minnesota’s farmers not only had to deal with market conditions within the United States, they now had to compete with producers throughout the world. This led to booms and busts in the agricultural economy, including the farm crisis that swept across Minnesota from the late 1970s through the 1980s. Second, Minnesota companies worked to accelerate a process that began long before World War II: adding value to raw materials through processing and manufacturing new products based on agriculture’s bounty. Corporations such as Cargill, General Mills, International Multifoods, and Hormel became integrated food companies, producing everything to flour to packaged and canned foods to owning restaurant chains. Pillsbury, for instance, created what became the Pillsbury Bake-Off Contest in 1949 to promote the use of its products in American kitchens and, eventually, throughout the world.

The biggest factor in Minnesota’s postwar boom was the development of Minnesota’s computer industry. Five firms (Engineering Research Associates, Univac, Honeywell, Control Data, and IBM-Rochester) created an industry centered on the Twin Cities but which benefited the entire state. The five anchor firms worked with specialist firms that provided services, such as design and specialist manufacturing, and ancillary industries that supplied products and expertise. These companies were headquartered or had facilities in communities such as Alexandria, Hutchinson, Rochester, and a variety of other places throughout the state.

On top of all of this, Minnesota’s computer industry originally specialized in producing equipment for the Defense Department and national intelligence agencies such as the National Security Administration. This allowed Minnesota to partake in the Cold War defense-spending bonanza of the 1950s and 1960s and put the state in a position to reap the benefits of the non-defense expansion of federal, state, and local government computer demands, as well as the growing private-sector demand for computing equipment.

Over the next two decades, these firms created a web of subcontractors and connections with educational institutions such as the University of Minnesota that became one of the first high-tech regions of the digital era. This business environment generated both high-paying jobs and encouraged entrepreneurial-minded employees to create their own firms that could supply products and services to the original companies. It also served to develop a stock of highly educated residents who could work in a variety of industries.

Both of these factors helped keep Minnesota’s income above the national average when the center of the computer industry shifted during the 1980s from the large, high-end machines designed and built in Minnesota to the personal computers of Silicon Valley in California. The technical expertise and entrepreneurial abilities accumulated in the 1960s and 1970s remained in Minnesota and found new outlets in both retailing and manufacturing.

The Target Corporation’s growth derived in part from its proximity to Minnesota’s computer industry. Dayton’s created a discount retailer, Target, in 1962, and managed the business in part through the use of computerized inventory systems which led them to purchase equipment from IBM in Rochester and to hire a growing number of people trained in computer programming and associated fields. As Target grew during the 1970s and 1980s, the need to create increasingly sophisticated management information systems grew as well and the Twin Cities were well-positioned to supply the necessary talent. Best Buy and Supervalu took advantage of these same trends to join Target as Fortune 500 companies in the 1990s.

Medtronic Corporation similarly benefited from the environment created and nurtured by Minnesota’s computer industry. Control Data, in particular, pioneered the use of transistorized components in computing equipment and Medtronic could tap into this expertise, both in terms of hardware and brainpower, to develop wearable, and eventually implantable, medical devices in the 1970s and 1980s. By the early twenty-first century, Medtronic’s success along with the resources of the Mayo Clinic and the University of Minnesota Medical School led to the development of a thriving medical technology industry in Minnesota.

The future

In the 1980s, Governor Rudy Perpich touted Minnesota as “the brainpower state.” This is, ultimately, the story of Minnesota’s economy. Brains, and brawn, drove Minnesota’s economy from one grounded in natural resources and agricultural products to a broad-based system of agriculture, manufacturing, and services. We cannot predict exactly how Minnesota’s economy will change in the coming years, but it is certain that its fate ultimately rests with the brainpower of its citizens and the new ideas they will give birth to in the years to come.

For more information on this topic, check out the original entry on MNopedia.

Louis D. Johnston

Louis D. Johnston, a professor of economics at the College of Saint Benedict and Saint John’s University, specializes in macroeconomics, economic history, and the connections between economic policy and economic history. He writes a column on economics and the economy for MinnPost and is a guest on Minnesota Public Radio, WCCO Radio, and Twin Cities PBS.